Corporate Cash Key to Canada Rebound in Flaherty Budget: Economy

Finance Minister Jim Flaherty wants
Canadian companies to invest more of their record cash holdings
as a way to spur an economy held back by consumer debt,
government austerity and stagnant exports.

Flaherty’s C$253 billion ($247 billion) budget announced
yesterday includes C$1.4 billion in investment-tax credits and
C$500 million in grants to train workers while also aiming to
eliminate the deficit by 2015. Bank of Canada Governor Mark Carney is also cajoling companies into putting some of what he
called their “dead money” to productive uses or pay it out in
dividends.

The world’s 11th-largest economy is expanding at the
slowest pace since emerging from recession in 2009. While tax
credits and low interest rates kept consumers borrowing and
spending in the early part of the recovery, the household debt-
to-income ratio is now a record 165 percent, putting the onus on
companies such as Suncor Energy Inc. (SU) to lead the expansion.

“It really boils down to exports and business investment
carrying the growth mantle,” Derek Burleton, deputy chief
economist at Toronto-Dominion Bank, said in an interview from
Ottawa. “Canadian businesses need to step up and become more
innovative and productive.”

The Bank of Canada projects housing investment will
subtract 0.1 percentage point from growth this year and next,
while business investment is forecast to accelerate, accounting
for one-third of the country’s 2.7 percent growth in 2014.

Still, company spending will increase this year at the
slowest pace since 2009, according to a Statistics Canada survey
released Feb. 27. Carney said last month the “rotation” of
demand from the country’s indebted households to businesses “is
the fundamental challenge” for the country’s economy.

Business Confidence

In Europe, German business confidence unexpectedly fell
from a 10-month high in March as Cyprus inflamed the euro
region’s debt crisis.

The Ifo institute in Munich said its business climate
index, based on a survey of 7,000 executives, declined to 106.7
from 107.4 in February. That’s the first drop in five months.
Economists predicted a gain to 107.8, according to the median of
42 forecasts in a Bloomberg News survey. In France, industrial
confidence was unchanged this month.

Flaherty’s budget aims to spur this rotation by extending
tax credits for investments in factory equipment and proposing
C$15,000 worker training grants. Flaherty pointed to shortages
of skilled trades workers such as electricians, carpenters and
engineers, saying he hopes to encourage “short-duration
training” at community colleges or union training centers.

Research Support

The budget also allocated C$1 billion over five years for
research by aerospace and military companies such as CAE Inc.,
the Montreal-based maker of flight simulators, and C$92 million
to help forestry companies find new markets.

The budget put factories “at the heart” of Flaherty’s
growth strategy and “recognizes the importance of manufacturing
and exporting for each and every Canadian,” Jayson Myers, head
of the Canadian Manufacturers and Exporters advocacy group, said
in a statement.

“Shifting focus to the business side is acknowledging that
for the recovery to be sustained they need businesses to start
to spend,” Nathan Janzen, an economist at Royal Bank of Canada,
said in an interview yesterday.

Cash Stockpiles

Non-financial companies held a record C$600 billion of
currency and deposits in the fourth quarter, up from C$434
billion in mid-2009 as the last recession ended, according to
Statistics Canada. Similar U.S. companies held a record $1.79
trillion in liquid assets at the end of last year, up from $1.42
trillion in mid-2009.

Calgary-based Suncor, the country’s largest energy firm,
led all Canadian companies with C$4.39 billion in cash and
marketable securities, according to Bloomberg calculations.
George Weston Ltd. (WN), majority owner of the Loblaw Cos. grocery-
store chain, had C$3.72 billion. Twenty-three companies had cash
and marketable securities worth more than C$1 billion.

Those reserves are too high, Carney has said. “The level
of caution could be viewed as excessive,” he told reporters in
Toronto on Aug. 22. Companies should “put money to work, and if
they can’t think of what to do with it, they should give it back
to their shareholders.”

Reasonable Reaction

Bank of Montreal chief economist Doug Porter says large
company cash reserves are a reasonable reaction to recent
events. “This is the byproduct of the financial crisis, one of
the key lessons many learned was you don’t want to be caught
short of cash,” Porter said. “We have also had huge swings in
commodity prices in recent years, and to protect against that I
think it’s perfectly rational to build up a somewhat bigger
buffer.”

Flaherty’s budget presented yesterday projected Canada will
swing to a surplus of about C$800 million in the fiscal year
that begins April 2015, from a C$25.9 billion deficit in the
year ending this month, by limiting program spending growth to
the slowest pace since the 1990s.

Ultimately, what will get Canadian companies to invest is
faster growth in the U.S., which buys three-quarters of Canada’s
exports, said Toronto-Dominion’s Burleton.

“There isn’t much the government can do to get businesses
to invest if they are in an uncertain market,” Burleton said.
“The U.S. is a big part of that puzzle.”